Hostages, Free Lunches and Institutional Gaps: The Case of the European Currency Union

Günter Franke ()

No 2011-47, Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz

Abstract: This paper argues that the strong member states of the European Currency Union are hostages of a financially distressed member state so that they are compelled to provide financial support. Moreover, due to the dynamics of the interaction game, a debt relief is a free lunch for the distressed country. This fosters moral hazard of distressed countries. In the absence of capital market control, European politics do not effectively monitor fiscal politics of member states. The lack of a long term strategy of the European Currency Union to deal with distressed states has undermined the credibility of politics. This lack is also explained by a lack of a European Insolvency Charter. A viable Union requires such a charter with rules for handling distress. Moreover, politics should determine a mechanism to coordinate politics and capital markets in their monitoring of fiscal and economic policy of member states.

Keywords: European Currency Union; European Insolvency Charter; hostages; free lunch; externalization hypothesis (search for similar items in EconPapers)
JEL-codes: E62 F36 F53 H30 H60 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2011-11-20
New Economics Papers: this item is included in nep-eec and nep-mac
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Related works:
Journal Article: Hostages, free lunches and institutional gaps: the case of the European Currency Union (2012)
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